Access, Board Size and Inventives in Nonprofit Firms

By Rajesh K. Aggarwal, Mark E. Evans and Dhananjay Nanda

We study the relation between board size and managerial incentives in non-profit firms. We present a model where board membership is granted to parties that wish to direct the manager’s actions in exchange for assets that they bring within the firm. These board members (directors) differ in the relative value they place on the nonprofit’s activities. In this setting, we show that the manager’s incentives are lower than would be had the board been smaller, although the nonprofit’s ability to raise funds is higher. Our empirical results are consistent with the model’s predictions. We find that non-profits that pursue more objectives have larger boards, lower managerial pay-performance sensitivities, and higher revenue and program spending growth rates.

Fuqua School of Business, 2006